By Dr. James M. Dahle, WCI Founder
A couple of weeks back I wrote about the New WCI Asset Allocation. If you read it, you may have noticed that we are now dedicating 20% of our portfolio to “alternative” types of investments, chiefly real estate, but also including other interesting asset classes–basically anything other than the stock and bond index funds that make up 80% of our portfolio. In reality, the “change” was really an acknowledgement that we had some investments that weren't being formally included in our asset allocation/written investing plan rather than any significant change in asset allocation. In this post (and subsequent updates) I'll be discussing the nuts and bolts of these investments so you can follow along at home.
Update on Real Estate Investments
First, let's do an update on the real estate investments we have owned for a while. You can compare to this prior post about our Real Estate Empire. The main theme you will note here is that we have very little interest in buying (and especially managing) an entire property. Not only are we not really any good at it, but we really disliked being landlords. We mostly prefer to invest our time actively and our money passively.
Publicly Traded REITs
Yup, we still own the Vanguard REIT Index Fund. Despite a terrible beginning, we have had excellent long-term returns from this investment since we added it shortly after getting out of residency back in 2006. Our official, annualized, XIRR returns come out to 12.33% per year from 2006 to present. Not bad considering the 78% loss we took in the Global Financial Crisis. Over the years this has been 7.5% of our portfolio, but it will be trending down to 5% and perhaps even lower to make way for other investments. I love the convenience, liquidity, and low costs of this fund, but dislike its moderate correlation with the overall stock market. In my stock-heavy portfolio, that's a big deal.
Our Partnership Office Building
Bonus points if you know where this is
This has been one of our best investments of all time, although a lot of that is just luck in my case. For some reason, the year I made partner they let me buy into the investment at a price that was several years old, giving me an instant boost to my return. Unfortunately they only let me buy two shares. In addition, the old building was recently sold and the LLC bought a new, larger building. We got a great price on the old building, further boosting my return. The shares split and I was able to buy more so this is becoming a bigger and bigger chunk of my portfolio. The income from the property is going toward paying down its debt, but I'm fine with that. My XIRR return on this investment as of the first of the year was 21.55% per year for the last four years. Our investment is currently worth about $33K.
Indianapolis Apartment Complex
This has been a bit of a disappointment so far and may continue to be one. This was my first (and so far only) investment through the crowdfunded platform at RealtyMogul, one of this site's advertisers. I think the minimum on it was $20K, but they let me in for half of that, or $10K. We put the money into the investment in November 2014, a little over 2 years ago. We get a report from time to time, but most of them seem to list problems that have been encountered. For example, HUD apparently disagreed with the management team about how much needed to be held in reserve and so held on to a bunch of cash. That cash, of course, happens to be the same cash that was supposed to come to me. The initial documents on this investment projected a 15.5% IRR and a 9.5% cash on cash return. Meanwhile, my actual XIRR return on this investment (valuing my share of the partnership at the $10K I bought it at) is 3.77% per year. That's obviously a lot less than 9.5%. The management team says:
Most of this cash is withheld by HUD until we complete the remaining 29 rehabs. Our goal is to complete all rehabs as occupied rehabs, enabling all work to be done by the end of April. The choppiness of your investment returns is directly correlated with the timeliness of rehabs and the 60+ day lag on reimbursements; however, this choppiness does not affect our confidence in the long-term performance of the asset.
Let's just say the choppiness IS affecting my confidence in the long-term performance of the asset. But hey, it's a 5-7 year investment (and it's only $10K). Let's give it some more time.
Salt Lake City Apartment Complex
If you'll recall, this is a building being built from scratch with a preferred equity structure that we purchased through Fundrise. Our investment is only $5K. Without fail, they send me $168.75 per quarter. I calculate my return (again valuing my investment at $5K) at 12.50%, not quite the promised 14% return. It's been fun to drive by occasionally and see it going up. (The White Coat Investor earns a commission if you sign up with Fundrise.)
The House Flip
You'll recall we had a $2K investment through RealtyShares. This was a one year debt investment I bought in summer 2015 for a house flip. It made all the payments as promised and I even got my money back, for a 9.14% return, slightly better than promised.
My Grocery Store
I own a little tiny chunk of the strip mall closest to my house, including the grocery store we shop at. This was a $5K investment crowdfunded investment bought through RealtyShares that was supposed to have a 6% cash on cash return for the first three years and an overall IRR of 16.6-19.8%. They basically send us $25 a month (and haven't missed any payments.) That works out to an XIRR of 5.33%, a little less than the promised 6%.
The Hospital
At the time I wrote that last post, I had just committed $30K to buying some of the land on which the new hospital our group staffs is located. The investment ended up falling through due to some legal/structuring issues and they gave us all our money back with a little interest (and I mean little) a few weeks later. I anticipate I'll eventually buy some syndicated shares of our main hospital, but haven't yet done so.
I expected to buy some more crowdfunded real estate investments later in 2016, but ended up putting that money toward our mortgage which is rapidly dwindling. More details on that in a future post. But we expect to invest some more in 2017, particularly the latter part of the year after all the 401(k)s, Roth IRAs, and DBP are funded and the mortgage is paid off.
Our Alternative Investments Portfolio
So what is actually in the 20% of our portfolio currently dedicated to real estate and other alternative investments RIGHT NOW? It's a mess. Here's the list:
- Vanguard REIT Index Fund
- Partnership Office Building
- Indianapolis Apartment Complex
- Salt Lake City Apartment Building
- The Grocery Store Strip Mall
- TSP S Fund (I know, not an alternative, but it takes time to move illiquid investments around and fund them so this will make up the difference for a few more months.)
- Lending Club Roth IRA Account- 70% liquidated and transferred but will probably have a small amount there for years.
- Lending Club Taxable account- 90% liquidated and transferred
- Prosper Taxable Account- Stuck with this tiny account for years as Prosper no longer lets you sell notes
- Physician on FIRE
The Future
So what does the future hold for this section of our portfolio? It holds lots of fun stuff that I'm really excited about.
Less Mutual Funds
The TSP S Fund (an extended market/mid cap fund) should be phased out of the portfolio by the end of the year and the REIT Index Fund will also decrease to around 5%. Long-term readers know I have a portfolio that is almost entirely in tax-protected accounts. While I would love to have tax protection for really tax-inefficient assets like P2P Loans and real estate debt investments, it introduces a fair amount of hassle (although I am considering a checkbook Roth IRA) and additional expenses. So most of these alternatives are just going to be held in taxable. That means I can't move money into this section of the portfolio any faster than I can grow my taxable account, and I'm not going to fund taxable while I have tax-protected space available to me. That money has to come from somewhere. It will come from the (hopefully) ever increasing earnings of WCI, from cash flow freed up by paying off the mortgage, and from our small taxable mutual fund account as its appreciated assets are used for our charitable contributions and replaced by the future earnings earmarked for those charitable contributions. Bottom line, it'll take some time for us to grow our taxable account to 10-15% of our portfolio, especially since we fund all the tax-protected stuff first.
Some Hospital Shares
I expect I'll buy a few syndicated shares of our hospital in the next year or two. The returns have been pretty good for past investors and correlation ought to be low with the rest of the portfolio.
More Crowdfunded Real Estate Debt Investments
As noted in my recent post about liquidating our Lending Club investments, I prefer a 9-10% return backed by an asset I can foreclose on than a 9-10% return backed by someone's word (especially when that someone is dumb enough to borrow money on credit cards.) I'm sure we'll have more of these in the future. I also have some local contacts that do some hard money lending to trusted real estate investors.
One tricky aspect of crowdfunding is that unlike with a mutual fund that owns companies located in many states, you directly own these investments as a partner in an LLC. That may mean filing a state income tax return in those states. My understanding is that the debt deals can be in any state and I just pay taxes on the income in Utah. However, the equity deals may actually require me to file a state tax return. That sucks. Luckily for me, my only out of state equity investment is in Indiana, where they require a composite return to be filed. Otherwise, my entire investment return on that tiny investment would be eaten up by the cost and time of filing an Indiana return. At any rate, I intend to very carefully monitor whether I will need to file an extra state tax return before getting into any more out of state syndicated deals. I'll stick with Utah, the 7 income tax-free states (AK, FL, NV, SD, TX, WA, WY), and states that require a composite return be filed by the LLC.
The Plethora of Crowdfunded WebSites
One of the biggest difficulties I've had with the literally hundreds of crowdfunded real estate websites that have appeared on the scene since the JOBS act of 2012 is separating the wheat from the chaff. Each of these entities is competing both for investors and investments and obviously are incentivized to put together as many deals as possible. Since it takes years to do a round trip through an equity investment and since these are essentially all accredited investor only investments, there is no Morningstar where you can go get detailed information about the investments. The closest thing I have found is some yeahoo's blog reviewing them. He divides them into 6 tiers. The crazy thing is that not a single site meets his requirements to be in the top tier and 80% of the sites are in the bottom tier due to “not enough information available.” That leaves four tiers. The 2nd tier is called “The All Stars.” He considers these companies to be All Stars:
- Peer Street
- Real Crowd
- Realty Mogul
- Realty Shares
- Acquire Real Estate
- LendingHome
- Roofstock
- Patch of Land
That's nice, since two of the three I'm using made the list. Fundrise, the third company I have actually used, apparently used to be in that tier (and in fact was ranked number 1 back when I invested in it), but has dropped to the fifth tier after some legal issues related to the unexplained resignation of their CEO with replacement by his brother and a change in the business model to exclusively using eREITs (which are also offered by other sites but which I'm definitely not sold on. Perhaps more in a future post about those.)
Other crowdfunded websites that advertise with WCI include:
Equity Multiple (in the fourth tier-“Up and Comers”)
I'm really excited about this company. They might be ranked by this random review site as an “up and comer” but I'll be including them in my search when I next look for a crowdfunded real estate investment. They are one of the few sites whose principals co-invest in every investment and publishes their returns quarterly. Kudos to that kind of transparency.
Fund That Flip (now branded Upright) (in the third tier-“Contenders”)
These guys do all debt investments and unlike most sites, have a number of investments with a LTV of < 65%. I'll include them when I look for my next debt investments later this year as well.
Crowdfunded Equity Investments Versus Private Funds and Syndications
There are some serious benefits to using a crowdfunded site in comparison to finding your own syndicator or fund. These include:
- Lower minimums- It is much easier to diversify with a $2-20,000 minimum than the $50-100,000 minimums you often see with more private deals. This not only allows you to diversify between deals, but also between crowdfunding websites. Diversification protects you from what you don't know.
- Extra set of eyes/due diligence- If you're like me, your experience with real estate investing and the business world in general is limited. Having the experienced eyes of the crowdfunder going through the deals and throwing out the obvious losers has some benefit. There is a cost (i.e. an additional set of fees) you have to weigh against that benefit though.
- Convenience- If you're willing to use a half-dozen different crowdfunding sites, there is essentially always a reasonable deal ready to go when you have the money to invest. It is a lot tougher to do that with private funds or syndicators.
Advocates of using a private fund or a private syndicator would point out that crowdfunding websites attract inexperienced investors–Perhaps the truly experienced and talented managers have investors lined up out the door to invest with them as fast as they can find deals to invest in. Once you have found a talented manager you trust, you can then invest in all of their future deals. While it lacks diversification, it is essentially the Warren Buffett principle of “Put all your eggs in one basket and watch it very closely.”
However, there are significant downsides to going the private route.
- Due diligence- You've got to do all this yourself, and given the amounts you'll be investing, you'd better. That might mean flying out and meeting the management team, going to see the investments, or even doing background checks on the principals.
- High minimums- $50-100,000 is typical. A typical doctor might only invest $50K in an entire year, and much of that will be going into 401(k)s and Roth IRAs. Coming up with $100K all at once is tough for a young accumulator.
As you can see, there are pluses and minuses with each of these models. Some of the current and previous WCI advertisers offer private funds or syndications, all of which I have considered investing in, but haven't (mostly because I don't have the taxable money to do so.) These include:
Origin Investments– I had dinner in Salt Lake with one of their principals last month and I really like their approach to investing. They are just about done raising money for their third fund, but have had exceptional returns so far with their first two funds. The $100K minimum is still a bit of an issue for me, but hopefully in the near future that sort of thing won't be as big of a deterrent for me.
37th Parallel/Nest Egg Rx– Dennis Bethel is an emergency doctor now turned real estate investor who has advertised on the site in the past. He works with 37th Parallel and a few WCI readers have invested with them in the past. I have yet to hear a complaint and I've asked everyone who has invested to send me feedback when they can. The last time I looked into it there was a $50K minimum. It seems to be working out for Dennis as he hung up the stethoscope last year.
Larson Capital Management- This is the arm of Doctor's Only (Larson Financial) that offers real estate funds to their clients. I think they're on their fourth or fifth fund with several properties going into each fund. Initial returns on the first few funds look promising. The last time I looked into it, the minimum was $50K.
There are hundreds of other real estate investing companies out there. There is no way I could ever look at even a small fraction of them. But I expect I'll eventually invest in one of these companies or one of their competitors. Before doing so I will certainly do more due diligence and I recommend you do too.
Life Settlements Fund
Some time ago I wrote about investing in Life Settlements. This is basically buying whole life policies from people who want to get rid of them at a price so good that your return on a diversified portfolio of them provides a solid investment return. The attraction here is solid returns with an asset class that ought to be dramatically uncorrelated with stocks, bonds, and real estate. I'm still interested, but like the private real estate funds, the minimums (typically $50-100K) have been high enough to keep me out in the past. This is on my list of things to invest in “some day.”
Growing the WCI Network/Buying Websites
Most of you noticed I bought a small piece of Physician on FIRE, LLC recently. I'm certainly no expert in real estate investing, but I'm pretty good at running a website, particularly in this niche. As discussed in a post last year, I am interested in buying websites, particularly websites where I can add significant value. I expect I will buy part or all of more sites in the future. Sites in this niche, assuming our “proof of concept” experiment these next few months goes well, will become part of the WCI Network. The best part of this network is that not only can I dramatically increase the return of my investment using my expertise and hard work, but that the investment also increases the value of my own business. I fully expect my investment in POF, LLC to be a “ten-bagger” within a few years, not even including the value the network brings to WCI. At any rate, POF, my “biggest competitor,” now has no bigger cheerleader for his success than me!
Well, there you go. That's what we're doing and what I'm thinking with respect to the alternatives portion of our portfolio. This is certainly the “fun” part of investing for me, but it's not play money. This is just as much “serious business” as the index fund portion. These investments all have the potential for outstanding returns and should have low correlation to the remainder of the portfolio.
If you choose to invest with these crowdfunding sites, I would appreciate you doing so using these affiliate links as it helps support the site at no additional cost (and sometimes significant additional benefit) to you:
Invest with RealtyMogul!
Invest with Fundrise!
Invest with Equity Multiple! Management fee on your first investment waived when using this link.
What do you think? Do you invest in alternatives? What percentage of your portfolio do you use? How do you invest in real estate? What do you think about the crowdfunding websites versus private fund dilemma? Comment below!
WCI’s No Hype Real Estate Investing is the best real estate course on the planet and the best way to get started in this exciting (and profitable) asset class. Taught by Dr. Jim Dahle and more than a dozen other experts, this course is packed with more than 27 hours of content, and it gives potential investors the foundation they need to learn about all the different methods of real estate investing. If you’re interested in real estate investing, you can’t afford to miss the No Hype Real Estate Investing course!
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Swensen’s argument for investing in alternatives is that their dispersion of returns is greater than mainstream investments. Swensen thinks he can pick the right active managers to take advantage of that dispersion, and history has proven him right. However, he cautions against retail investors doing this. They most likely will not be able to pick the best managers. And their costs won’t be low and their liquidity won’t be good.
“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” Paul Samuelson
WCI quotes:
“The main theme you will note here is that we have very little interest in buying (and especially managing) an entire property. Not only are we not really any good at it, but we really disliked being landlords.”
“So what does the future hold for this section of our portfolio? It holds lots of fun stuff that I’m really excited about.”
“I’m really excited about this company.”
“Once you have found a talented manager you trust, you can then invest in all of their future deals”
“There are hundreds of other real estate investing companies out there. There is no way I could ever look at even a small fraction of them. But I expect I’ll eventually invest in one of these companies or one of their competitors.”
“I’m certainly no expert in real estate investing”
“I fully expect my investment in POF, LLC to be a “ten-bagger” within a few years”
“This is certainly the “fun” part of investing for me”
WCI, it looks like you’re confident that you can pick the right managers, who will do the investing for you. And in the future, it looks like you’re confident that you can pick the right private real estate stocks. You find alternative investments fun and exciting. You fully expect that one of your investments will go up 1000% within a few years.
My greatest enemy as an investor WCI has been myself. My number one problem has been overconfidence. Possibly my number two problem has been buying lottery ticket investments. A third problem has been using my investments to meet my emotional needs, rather than my financial needs.
Thanks for the advice. You’re not the only one who has told me, regarding this post, that “you’re making a huge mistake.” However, it seems unlikely given my age, the amount I have invested in boring old index funds, and the amount I save each year that I’m going to be eating Alpo in retirement, so I’m not too worried. And if this all blows up, several of you can come back and say “I told you so!”
Park, I’m a devotee of David Swensen… and have actually blogged about his thinking regarding alternative asset class investments several times in the last few months. I would distill my understanding of his ideas a little differently.
As I understand his book “Pioneering Portfolio Management”, Swensen sees traditional asset classes as so efficient that you can’t practically beat the market with an active management approach–especially once you consider costs. The good news is, a passive approach delivers great long run (median) returns.
In alternative asset classes, markets are so inefficient that the average (median) investor gets sort of beat up, the top quartile gets great returns, and the bottom quartile gets really bad returns… so that means if you can place money with a top quartile performer *and* if you can negotiate a good compensation arrangement with that manager, you can dramatically beat the passively managed traditional asset portfolio.
P.S. Heartily recommend Swensen’s “Pioneering” book to anyone thinking about alternative asset class investments.
I’ve read Swensen’s “Pioneering” and “Unconventional Success” books, and I agree with what you’ve written.
“if you can place money with a top quartile performer *and* if you can negotiate a good compensation arrangement with that manager, you can dramatically beat the passively managed traditional asset portfolio”
Swensen can do this, but I can’t. Can you?
>Swensen can do this, but I can’t. Can you?
I would say “yes” if you’re talking about private equity in business ventures (like an interest in a CPA firm or in publishing) when I am actively, actively involved and have lots of tacit knowledge about the industry… in these cases, I am easily getting a top quartile return… and I am pretty sure that many regular readers are experiencing the same thing in their professions and small businesses once they’re really up to speed… (So, e.g., the ownership interest a doc might have in the partnership or corporation they work in…)
A resounding “no” if you are talking about an out-of-state farm which my family has no business owning since no active participant knows anywhere close to what is necessary to know to successfully farm… in this cases, I am sure we are getting a return in the lowest quartile and that the investment generates a terrible return.
That’s a reasonable response to the question. You are focusing in areas where you have an edge.
>You are focusing in areas where you have an edge.
Thank you. That’s a kind evaluation. But to be totally accurate, there still is that farm… 🙁
I dont get it, WCI is the manager and he knows websites, How is that not directly in his wheelhouse? And when did RE become an “alternative” asset? I dont get your visceral distate and over simplification bordering on straw man arguments.
WCI is the manager, and has a good head about him. This is just like everyone else saying “its impossible to beat the market” without realize the market is the average and someone beats it every year, and someone doesnt.
Just so there’s not a misunderstanding, I think this blog (WCI’s) is a private equity investment. Jim’s ROI on this is obviously a top quartile “private equity” investment. (See state of the blog posts he does every year for details.) And this means he’s smoked the returns available in traditional asset classes (like stocks and bonds), surely. In effect he does this by wearing both the “investor” and the “investment manager” hats. Which is what entrepreneurs often do.
Regarding private real estate investments and especially those made directly by the investor, my professional observations mesh with what Swensen says, which is that the top quartile do impressively better… and that some people learn to be top quartile real estate investors.
Tangential remark: Real estate’s illiquidity also seems to benefit some investors since there’s a forced savings element here and then it’s harder to convert to cash.
“he’s smoked the returns available in traditional asset classes (like stocks and bonds), surely. In effect he does this by wearing both the “investor” and the “investment manager” hats.”
I agree with what you’ve written, and the above statement nails it.
The conflict of interest between principal and agent (“investor” and “investment manager”) is a recurring theme. When someone is both, that conflict disappears. When that conflict disappears and the principal/agent has an edge, the principal/agent can do very well.
About the principal/agent issue, it’s minimized with index funds. Index funds turn investments into commodities to some extent. And with commodities, price alone tends to drive decisions. Think of how you buy gasoline.
Once again on the principal/agent issue, David Swensen has been successful as a principal, in selecting and maintaining agents. However, he himself tries to dissuade others from doing that. His reasoning is that he selects agents in areas of investing which are less efficient, and as a result have a wide dispersion of returns. In addition, his group is good at selecting agents.
But the average retail investor, including myself, isn’t. Even if one is successful in finding an agent who can deliver alpha (beat the market), the data would indicate that the alpha ends up going to the agent in the form of fees.
Is David Swensen’s group the equivalent of Warren Buffett, when it comes to selecting agents? Warren Buffett has beat the market by about 10% a year historically. But to some extent, he’s the exception that proves the rule.
Some would say that my comments about private equity, private REITs and hedge funds aren’t relevant to the private investments mentioned in this blog post. That might be true. But when all the research, that I know of, in private investments indicate that you’re better off with publicly traded investments, does this indicate a class effect? IOW, are private investments in general a bad idea for the average retail investor? I can only raise that as a hypothesis, because I don’t have the data to say anything else. But from what I’ve seen, the problems that a retail investor is exposed to in public investments (costs, liquidity, transparency) are if anything magnified in private investments. For example, I can ride the coattails of sophisticated investors in public investments, but that’s much less likely in private investments.
I’ve made implied criticisms of WCI in this thread. That actually isn’t my purpose. I post on these sites because it helps me clarify my thoughts about a topic, and I also get meaningful feedback. It’s a much more active way of learning, that complements reading and listening well.
I should add that I’m looking at doing some nonBoglehead investing of my own. I’m examining whether I should start my own quantitative fund (small cap value with momentum). DFA has been successful, and the academic research supports what DFA does. Larry Swedroe has looked at DFA’s investing strategy, and has said it’s not that complicated. I can get a much more concentrated value and momentum tilt on my own, than I can with publicly traded ETFs/mutual funds; that would be my edge. So far, I would agree with Larry Swedore that it’s not that complicated. But I’m still learning more, before I implement any plan.
I would encourage WCI in his website investments. He has expertise in websites that definitely gives him an edge.
Make sure to look at the aqr papers on factor investing, how much money each can absorb, and learn exactly what has contributed to the sc premium over time. Outside the depression, and a few market mergers, the sc premium hasnt always been reliable, especially on a geometric basis.
Microcap is different, but thats the crux of the issue, definitions matter, etc…imo, stockpicking can be profitable, but its very very very hard, and in single names youre exposed to so many things that you dont control nor have privy to (m/a, fraud, takeovers, etc…) that can change a perfect thesis.
actually a nice blog post about the topic over at dual momentum’s blog. Individual names are too much work without enough control of some of the biggest parameters. I dont see too much problem with shorting individual names as if you get in just after the ball starts rolling down hill, but otherwise too hard.
Indexes/etfs and market structure are where its at. Even factor ones if the costs dont outplay the thesis, then if youre generally correct in the sector you can still benefit.
I agree with you that the data isn’t there re private investments. Now we have to make a real world choice to not invest, invest a little, or invest a lot into these types of investments. You clearly have decided to not invest. I’ve decided to invest a little. Time will tell which of us made the right decision.
The market for publicly traded stocks and bonds is dominated by those who are better than me at investing. By indexing, I can ride their coattails and get results similar to them.
But when it comes to private investments, I can’t index and ride those coattails.
A counter to that is that there are areas of private investing, such as private real estate possibly, where the market may not be dominated by those better than me. It may be easier to get the proverbial edge in such markets.
About whether they have an edge, each investor has to make their own decision. Speaking for myself, my greatest problem as an investor has been my own overconfidence. Based on my history, I should be reluctant to decide that I have an edge.
Your humility will likely serve you well.
WCI, are you planning on going to Vegas :-)?
WCI, in your alternative investments, you’re using an active management approach to investing. The following is a quote from possibly the best active manager ever:
“Investors should remember that excitement and expenses are their enemies.”
Warren Buffett
George Soros once said, ‘If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.’”
Dont pay too much attention to what gurus say. Buffett does everything he tells people not to do.
The part WCI is excited about is an entrepreneurial pursuit, a business which he takes part in on a day to day basis, thats very different from “investing” as colloquially used and how you’re conflating them.
Are you of the start no businesses persuasion? Thats simply a preference, and not for everyone.
Park,
Didn’t really get what you were saying. Can you repeat it again?
Complete_newbie, hopefully the following will help you.
If you want to do better than indexing, you have to use active management. However, active management, whether in mainstream or alternative investments, is a negative sum game. Most people would be better off investing in index funds. Despite this fact, many use active management, even though they’d be better off indexing. An important reason for this is that human beings let emotion, rather than reason, guide their investment decisions. That’s what behavioral finance is about.
Thats not true in the least. Why would you “have to use” active management. There are plenty of ways to do better all by yourself. Too many broad generalizations and assuming the average case for absolute fact.
Think Park missed the /s in my post.
I now get the /s ;-).
Active management for stocks means trying to outsmart a bunch of other smart people based on public information. Active management for real estate is quite different because the manager you invest with has the ability to transform the asset by improving or repositioning it. In addition private real estate is all about asymmetric information. If WCI knows that a large medical group is about to take space in his office building that makes him a smart real estate investor. In the stock market it would make him an insider trader.
Yes, this point could even be expanded. In real estate you can add value, which is impossible in the market. Love the insider trading comparison.
Great Article. blog post , I was fascinated by the specifics ! Does someone know if my company could access a template NH DHHS DFA Form 800MA document to fill in ??
Excellent article. I’m an Ophthalmologist just getting involved in Real Estate Crowdfunding. I actually started a Blog on this topic less than 2 weeks ago to discuss my experience. http://www.EasyMoneyRealty.com
I agree that more time is needed to fully evaluate these platforms.
OMG I couldn’t agree with you more about the plethora of real estate crowdfunding sites. And there’s a similar challenge of separating the wheat from the chaff when it comes to crowdfunding sites offering other asset classes, like startup or business loans (or litigation financing, which is the New Hot Thing in investment crowdfunding).
I started experimenting with real estate crowdfunding about a year ago, but had previously done online angel investments through FundersClub and Wefunder, and so wanted to stay a bit more omnivorous in looking at crowdfunding opportunities, and what a pain to sort it out!
Twelve months later I’ve reached a few conclusions on the RE front: First, the likelihood of delays is _much_ higher than the platforms will acknowledge, and it’s clear that they don’t really report delays when showing historical returns. For example, I invested in a loan with Patch of Land that’s now in a 6-month extension; while it’s nice that I’ll probably keep getting interest payments during that period, part of the original selling point of the investment was the short hold time (which is now at least 50% higher than I had signed up for, so that principal remains locked up…). After talking to other investors, I’ve realized that kind of delay is much more common than would be expected the way the investments are advertised and returns reported.
Second (and related to the first), due diligence on individual debt investments doesn’t seem worth the opportunity cost, since you really need to diversify into at least a few dozen loans to get sufficient diversification against the inevitable defaults (while at the same time your upside is capped, unlike an equity deal). So ultimately I decided if I was going to keep investing in crowdfunding debt, it was best to get as broad exposure as possible, as cheaply as possible, and I have been happy with AlphaFlow on that front (I have no affiliation with them, though have interviewed their CEO for my site). I’ve decided to save my diligence time and energy for equity investments with bigger upside potential (real estate and otherwise).
My own site stemmed from similar frustrations about “separating the wheat from the chaff”, and while it’s no Morningstar, it’s an attempt to bring some visibility to the ecosystem, not just for real estate, but for all the other stuff too. The database is up to 80+ platforms (including a bunch that are open to non-accredited too), and it’s got a few different ways to sort and filter (for example, I like to know whether a platform is a broker-dealer or has an affiliation which one, as that has some important implications for the level of required due diligence on the investments). The full list is at https://yieldtalk.com/crowdfunding-investment-platforms/
Thanks for sharing. There’s obviously a huge need for sites like yours.
I’ve invested a token amount in a few Groundfloor Real Estate loans. As far as I know, it’s the only one of these types that is available to non-accredited investors. But it’s not available in all states. I’m not sure if I’ll be investing more with them.
Unlike the ones you mentioned with monthly checks, i just get a lump payment at the end of the term.
I currently have 20% of my port in Vanguard REIT. I’m not sure if that makes sense to continue going forward. It is pretty heavily correlated to equity index funds like you mentioned.
That’s a big REIT allocation, but the most important thing is sticking with a reasonable allocation, not the exact percentages.
That’s great for a low interest rate low inflation investment in a growing economy, but VERY risky if the tables turn to inflationary or bear market. The correlations between asset classes relative to VTI is:
VTI=1, (stocks)
VNQ=.76 (REIT)
VEU=.90 (international stocks)
VBMFX=0 total bonds
On a efficient frontier chart the VNQ reward/risk numbers are
11.02% return / 25% risk (SD)
so VNQ buys you very little diversification on a risk adjusted basis.
For comparison VTI is 9.79% / 15%
Best
It’s important to remember that correlations are a moving target, so it gets kind of silly to be using two decimal places with numbers like these.
@TJ: I haven’t invested with Groundfloor, but have heard generally positive things about them. A few others that are available to non-accredited investors that might be worth checking out: RichUncles (also currently only available in limited states), Fundrise, and RealtyMogul. Another one to consider that’s a bit different (but still in Real Estate) is American Home Preservation, which invests in non-performing mortgage loans (and explicitly works to help homeowners restructure the loans and remain in their homes). They also have much more flexible liquidity options than any of those other ones. And a couple smaller ones to look at open to non-accredited investors also are Indy-based Holdfolio (fractional investments in a portfolio of ~10 rental properties), and Small Change (investments in transit-oriented developments, some of which raise using SEC Reg CF, which is open to all investors). And finally, DreamFunded recently “pivoted” from offering startup investments to real estate, and will be offering those under Reg CF (which are open to non-accredited investors). There’s more details and profiles of all of the above on my site if you’re interested.
Tons of change in this area. It’ll be interesting to see how it all shakes out in a few years.
Great post! I have not run into too many ppl who are familiar with both real estate investing/alternatives and indexing. Most ppl tend to be either or as you’ve mentioned in one of your previous posts. Also most ppl tend to be very opinionated each approach. In your experience thus far, have you found the alternatives tend to generate better returns than your stocks/bonds? If it continues in this trend, would you consider increasing your allocation to a majority alternatives?
I find the outsized returns to be related to leverage in real estate. Would you consider just getting a LOC or loan and leveraging equities instead? With a physician’s salary, you could ride out short term volatility.
Yes, although there is a pretty long lag with real estate equity deals. They may work out, they may not, but I won’t know for years.
Yes. Very pleased so far. I could perhaps see going as much as 30-40% real estate, up from 20% now. Not planning to do it anytime soon.
No. https://www.bogleheads.org/forum/viewtopic.php?t=5934
If the returns you’ve seen have been better than indexing, why not increase the proportion to a majority alt/RE? I would think it makes sense to maximize the investment that generates the highest overall return?
Regarding to leverage, with interest rates previously so low I would think a case can be made to do it in a calculated way. If you invest with no more than what you can comfortably pay off in 2-3 years using a loan or LOC (so you don’t get margin called), I foresee the main risks would be: job loss, interest rate increase, and market crash (also behavioural problems as well). I think you’d have to have all 3 happen to get completely crushed. If either of the later 2 start occurring you could start devoting all new investment money to pay down principle rather than just interest. Do you think I’m missing something in this thought process? I had two scenarios in mind: If you have income properties that are paid off and you leverage with a HELOC. The rent can cover the interest and eventually pay down the loan slowly over 10-20 yrs?
If there’s another major market crash and you exercise leverage at that point. I’m in Canada so since 2008, prime has been around 3% for almost 10 years. It’s slowly ticking up so now might not be the ideal time but if things crash again to the point where interest rates drop again, would you discourage me from entertaining this idea?
Know 50 successful finance bloggers who want to sell me part of their blog? Me neither.
Two other factors:
1) I haven’t even gone round trip with a handful of real estate investments.
2) No, it doesn’t make sense to maximize the investment with the highest return – once you’ve won the game, stop playing. (i.e. don’t take more risk than you have to.)
It pays to be cautious and diversify. You only have to get rich once.
Same with leverage- I don’t need to take leverage risk to reach my goals, so I don’t.
I think you should read the famous Market Timer thread: https://www.bogleheads.org/forum/viewtopic.php?t=5934
Thanks for the advice. I’ve gotten through 4 pages of this thread. It seems to be going in circles 🙂
Just an FYI – while Realty Shares has had a great run it looks like it should no longer be considered a viable option for your real estate crowdfunding deals. I would expect other platforms to run into similar hard times as the market evolves.
https://www.housingwire.com/articles/47368-real-estate-crowdfunding-startup-realtyshares-hits-hard-times-halts-new-investments
https://www.sfchronicle.com/business/networth/article/RealtyShares-downfall-shows-perils-of-13379804.php
Very well aware. There’ll be a post on it. I agree that not all 100+ of these platforms will survive. I really thought RealtyShares would be one of the survivors though.
It’s not a matter of “should no longer be considered.” You can’t consider it. They’re closed to new investments. It’s over.
I’d love to see you do an update on RE investing platforms. Despite being on the ‘top tier’ list, Peer Street and Realty Shares are both gone.
What is very important to me is that the platform doesn’t have investors buying unsecured debt obligations, whereby the investors are left holding an empty bag if the platform goes bankrupt. To my understanding, this is what’s very likely to happen with Peer Street and its investors. Conversely, some platforms have explicit arrangements so that even if the platform goes bankrupt, investors are still (probably) going to be alright.
I don’t think that’s what is likely to happen with Peer Street. Certainly that didn’t happen with Realty Shares (I had an investment through them when they went out of business and it paid off exactly as expected.)
At any rate, the way to avoid platform risk is to go directly to sponsors, but that generally requires higher minimum investments. But I’ve had investments go bad that I bought through a platform (that didn’t go bust) and investments go bad that I bought directly. There are no guarantees and it’s important to remember that real estate is a risky investment in general (like stocks) and private real estate adds one more degree of risk in return for lower correlation with the portfolio, possibly higher returns (although some data out there they may even be lower), and perhaps an illiquidity premium.
There are several good websites out there that review the platforms in depth that I cover in our real estate course. Not sure recreating them would be useful.
David Stein, who runs the ‘Money for the Rest of Us’ podcast, indicated recently that Peer Street’s investors bought unsecured debt obligations from the company, not anything like a direct investment in the underlying properties. If that’s true, then investors are at least unlikely to be made ‘whole’. I don’t know enough about what happened to Realty Shares to comment about that, but I’m glad to hear that your investment paid off well.
I’ve invested a big chunk of my portfolio into crowd funded real estate, and I’m only interested in platforms where investors have a direct interest, either directly or indirectly through something like an indenture or trustee, in the underlying property. Obviously, those don’t entirely remove platform risk, but they certainly seem to reduce it significantly.
Your current thoughts on the pros and cons of the platforms your invested in would be helpful, especially in light of Peer Street and Realty Shares’ demises.
I don’t know how much David dove into the situation, but for most of these companies there’s a plan to take care of the investors even if the platform goes out of business. I haven’t seen anything that shows Peer Street is any different from Realty Shares in that respect. Have you?
I’m curious if you’ve made a list of platforms that give you a “direct interest” versus notes. It would be interesting to look at it. I totally get where you’re coming from though. That’s one reason I only go direct to funds now.
As far as platforms I’ve used in the past those include:
RealtyShares
Peer Street
RealtyMogul
Equity Multiple
FundRise
Fund that Flip
RealtyShares and Peer Street are now gone. FundRise only does private REITs now I think. So that leaves Realty Mogul, Fund that Flip, and Equity Multiple. I haven’t spent a lot of time looking at the individual pros and cons now that the group pros and cons are unfavorable for me.
The main reason to use these platforms instead of going direct is to get much lower minimum investments. The main cosn are that you may pay more in fees, you end up with sponsors that may have trouble raising money directly (often newer, less experienced sponsors), the platforms generally only get paid if they accept the deal onto platform causing a bit of a conflict of interest, platform specific risk etc.
I haven’t personally looked into the details of Peer Street’s offerings, so I don’t know. We’ll see how those investors make out.
I’ve been checking out FundThatFlip for years after seeing them on your site, and I like them a lot. They have an indenture that will step in to take over administration of the notes in the event that FTF declared bankruptcy. Most of their notes mature in a year or less, providing much better liquidity than what many other platforms offer, though your experience shows that this can be extended significantly. The $5k minimum per property means that you can diversify among many properties with a reasonably significant investment, and their originations remain strong while their delinquencies are pretty low.
Investigating Realty Mogul and Equity Multiple in depth is on my to-do list.
Have you considered going direct or are the minimums too high to allow you to maintain enough diversification?
The minimums are too high for me. That’s part of the reason I like FTF’s $5k minimum. Exposure to 20 different properties in half a dozen states with $100k, for instance, seems difficult to achieve on most other platforms.
Not necessarily. Instead of buying 20 individual notes for $5K each you could buy one fund with 80 notes in it for $100K. But you have to have $100K. If you only have $20K, you’re limited to the crowdfunding platforms or sticking with publicly traded securities.
That’s true, but it assumes equivalency between the 80 notes chosen by the fund manager and those you choose yourself. Whether the additional diversification is worth getting some notes that you might not want is subjective.
Alternatively, the person doing this full time is better at it than you are so you’re actually better off with the 80 they select than the 80 you select, even without including the value of your time.